Saturday, November 7, 2009

MarketWatch points out that Citigroup is actually already being broken up:

Citigroup Inc.... is already being broken up under part-ownership by the government, [Richard] Bove and other analysts say...

Citigroup, roughly a third owned by the government, is already being broken up, giving investors a preview of how other large financial institutions may be shrunk in future.

"The break-up of some of the banks has already occurred," Bove said. "Citigroup doesn't really exist anymore."

Late Thursday, the company unveiled plans for an IPO of its Primerica business, which sells life insurance, mutual funds, variable annuities and other financial products.

Citigroup sold its Smith Barney brokerage business to Morgan Stanley earlier this year and had already jettisoned most of its insurance operations.

Other businesses sold include its money-management arm, retail bank networks in Germany and Puerto Rico, brokerage, banking and consumer finance operations in Japan, Diner's Club and other credit card portfolios, payment processing businesses in the U.S., India and Brazil, and a controversial energy-trading unit called Phibro.

Businesses that remain on the block include Commercial Credit, The Associates, most of its mortgage, auto and student-loan portfolios and possibly its Mexican bank, Bove said.

Citigroup had $2.4 trillion in assets in September 2007 and this has declined to $1.9 trillion in two years, the analyst noted.

Citigroup has housed all the businesses it doesn't want in Citi Holdings, while the operations it wants to keep are in Citicorp.

The remaining institution will have roughly $1 trillion in assets, with a leading credit-card business, a large retail bank in New York, a medium-sized retail bank in California, a clutch of small private banks globally and a top payment-processing and lending business, Bove said.

"The Treasury Secretary and numerous other bank regulators have spoken repeatedly about the need to gain the power to liquidate companies that pose systemic risks," the analyst wrote in a recent note to investors. "Citigroup is the laboratory experiment to show how it can be done."

I applaud peeling off divisions of the TBTFs. But unless Glass-Steagall is restored, and the overall size of the banks reduced significantly, they still pose a gigantic and very real risk to the economy.

Indeed, the MarketWatch article goes on to quote Economist Henry Kaufman (a former Salomon Brothers executive who was on the board of Lehman Brothers) and Simon Johnson saying the same thing:

The firms would probably still be too big to fail, Kaufman said, adding that the only way to change this is to shrink the firms and limit many of their activities...

Simon Johnson, an MIT professor and former chief economist at the International Monetary Fund, reckons there should be caps of roughly $100 billion on the assets of financial institutions and "serious criminal consequences" if firms are caught trying to get around such limits.

Bove things that B of A will be next:

Bank of America, which has also received a lot of government support, is the next candidate to be broken up, Bove said.

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